7 Unreliable Economic Indicators That Move Markets

Investors and traders live on weekly and monthly economic reports published by private and public data agencies.

With the government shut down, much of the popular economic data — like the closely followed monthly U.S. jobs report — has been delayed.

But maybe we're better off without some of these reports.

The Bank of England keeps a table of which indicators correspond nicely to observed global growth. Air freight and Suez Canal data are useful, but there are plenty of other indicators out there that are just unreliable or overrated.

We rounded up seven heralded economic indicators that have drawn criticism from the experts. They are the market-moving reports that see huge revisions, use questionable data, or are just flat out misunderstood.

The Baltic Dry Index

This index measures the current cost of sending bulk commodities by ship around the world and often comes to vogue as the best indicator of the stock market or world economy.

Unfortunately, studies show it has almost no correlation with global GDP.

It's also extremely volatile in the short-run. Here's former BI writer Vincent Fernando: "Why do shipping rates seem to jump all over the place? Due to near-term supply of ships versus demand for commodities. It's just a matter of bottleneck problems. If rates go up it can come from either of two things: not enough ships at the time or too much commodities demand at the time. In a situation where ship owners match demand, which over the long run they will, then rates won't skyrocket and will just track their costs plus some margin for their effort."

The Consumer Confidence Index

This monthly survey asks consumers how they feel about current conditions and what they expect for the future.

"This figure measures sentimental rather than actual economic activity," said BlackRock's Russ Koesterich. "As a result, the consumer confidence index is highly volatile, making it an unreliable indicator of economic activity."

Nonfarm Payrolls

The Bureau of Labor Statistics' monthly jobs report, which tallies new nonfarm payrolls, is one of the most closely-watched, market-moving economic indicators in the world.

But according to Goldman Sachs economist Jan Hatzius, the report is "statistically insignificant." For one, payrolls are subject to major revisions months and years after the initial numbers come out. The report also comes out three weeks after the "survey week," meaning that there are timelier indicators out there. Because the Fed's monetary policy is so linked the labor market, the jobs report likely gets more attention that warranted, Hatzius notes.

The Volatility Index

Known as the "fear index," the VIX essentially measures investors' expectations for big prices changes. As a general rule, investors see a low VIX reading as a sign of complacency, which often precedes stock market sell-offs.

But as Citi's Tobias Levkovich wrote recently, the indicator is wildly misunderstood. "Looking back at volatility data reveals that there are much higher probabilities for market gains when the VIX is sitting between 10 and 15 than when it is in the 20-25 range," he wrote. "Levels of 20-25 do not generate good probabilities of market gains."

Durable Goods Orders

This monthly measure of hard goods orders from domestic manufacturers offers insight into business spending and investment.

Unfortunately, it has a "low correlation to future GDP," according to Blackrock's Koesterich, and therefore is a "poor predictor of economic growth."

There are, however, stats within the durable goods report that are more reliable.

Treasury International Capital System (TICS)

This popular Treasury Department report shows the list of the U.S.' foreign creditors. In recent weeks, the report has been stoking fears that foreign investors will stop buying Treasuries and borrowing rates will spike.

But UBS' Paul Donovan has cautioned against reading too much into the report. TICS data is not comprehensive, Donovan argues. "Investors who try to use the TICS data as a guide to currency intervention by emerging market central banks are likely to be misled," he recently wrote to clients.

Gross Domestic Product

GDP may be the gold standard of economic indicators, but it's also one of the most overrated, according to Blackrock's Koesterich.

"GDP is a backward-looking figure which is released too infrequently to be a useful predictor." Subject to revisions decades down the road, GDP numbers often look quite different as the years drag on.

Almost every other report is subject to revisions.

Unfortunately, most of the weekly, monthly, and even quarterly reports get revised heavily. And the scale of those revisions are inconsistent and can be very large.

Here's what Citi's Peter D'Antonio said ahead of last week's construction spending report, which was unfortunately delayed due to the government shutdown.

"The construction series has been revised so heavily month-to-month lately that it makes sense to discount any headline reading until it is confirmed in the following month’s report."

You can't count on anyone or anything these days.

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See Also:

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